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Thursday, 27 September, 2018

Tech startups conquering the world: If market share is the only thing that matters, how do you expand further? (Part 2)

Previously in the last article , we explored how it is important for startups to scale up fast, and looked into the potential of setting up businesses in China, India, the UK and US. In this article, we will continue to examine the business environment of different markets including Poland, Romania and Indonesia, and share case studies of two successful startups.

High human capital and low salaries in the center of Europe: Poland and Romania

Poland is the largest economy in Central and Eastern Europe and the sixth biggest economy on the continent. It was the only country in Europe that strengthened its position during the recent global financial crisis. World-class companies often choose Poland as their investment destination in Europe due to its business-friendly climate, central location and highly-skilled workforce at competitive rates.

The favourable condition of the Polish economy, dynamic development, as well as stable financial sector are strong magnets for foreign investment. According to FDI Markets report, Poland had the second best result for foreign investment in 2017 with EUR 12.89 billion invested by foreign entities, and the best result in the whole European Union for the number of jobs created.

Various forms of tax allowances and subsidies for investors increase Poland’s attractiveness. Today there are already 14 special economic zones operating in Poland, offering special conditions for investors.

Furthermore, human capital in Poland is assessed very favourably, especially Polish software developers who are perceived as some of the best in the world. Even though Poland has a large highly-skilled workforce, the labour cost in the ICT sector is still kept at a low level – 45-70% lower than Western European countries. Additionally, the country is also home to an extensive pool of IT graduates (80,000 Polish students major in IT related fields) with solid knowledge of English. Nowadays, 265,000 people are employed by business service centers (BSS) in Poland.

All aforementioned factors position Poland as one of the most attractive locations for business process outsourcing (BPO) and shared services centers (SSC) - over 1,000 are operating, whereas 22% of them are from the ICT sector. Krakow and Warsaw are two leading tech centers in Poland where the former has been recognised as one of the best 10 places for outsourcing in the world and is being named as “a remote outpost of Silicon Valley”.

Last but not least, government investments and the creation of an innovation-friendly environment are important drivers for stimulating development of the ICT sector. The huge growth potential of this industry is also confirmed by a large number of newly created startups.

Presently, there are about 3,000 startups operating in the Polish market. More than 50% of them were established in the ICT sector therefore we can expect a very dynamic expansion of this business area in Poland in the coming years. Poland has the potential to be a strong startup hub.

Romania comes second, after Poland, in Central and Eastern Europe in terms of market size and as a destination for tech companies, with over 100,000 employees in IT companies and over 80,000 in BPO & SSC. Cushman & Wakefield’s Business Process Outsourcing and Shared Service Location Index 2016 ranks Romania first within the mature locations for BPOs, after being second the year before. Some of the players in the local market include Genpact, CGS, Webhelp, HP, Oracle, Ericsson or Stefanini. Bucharest, Cluj, Iasi and Timisoara are the main destinations for foreign investors, but other secondary cities are also seeing growing interest.

Ease of doing business in Romania, coupled with a strong IT workforce with excellent command of English, make Romania a very good destination for R&D centers as well. IT staff are eligible for income tax exemption if they are working in an IT company.

Corporate income tax is 16% and tax on dividends is 5% which can be further reduced based on the EU Parent-Subsidiary Directive. General VAT rate is 19%. While in startup phase (annual turnover under 1 million EUR) companies only need to pay 1% tax on total income instead of the 19% tax on profit. The friendly tax environment is enhanced by a wide network of double taxation agreements and a general openness to international business.

There are no limitations for foreign companies to open companies or branches in Romania and no legal requirement to have a local director. Romania is a member of the European Union since 2007, so legislation is aligned with EU rules, which makes operations easy for EU companies or those with previous EU exposure. This also means that a presence in Romania can serve as a basis for business within the entire EU area.

An underrated emerging economy: Indonesia

Indonesia's economy has been soaring over the past decade and it is forecasted to become the world’s fourth largest by 2050. The growth of tech startups is also becoming important as the country has become one of the most thriving digital economies in Asia over the past few years. There are approximately 143 million internet users and 71 million smartphone users in Indonesia. Being the fourth largest population in the world with a rising middle-class population and strong growth in mobile and internet penetration, the country is on its way to develop a robust tech industry.

In order to fulfil its mission to become a leading tech destination in Southeast Asia, Indonesia officially opened the Nongsa Digital Park, a multimillion-dollar technology park which has been considered as the Silicon Valley of Indonesia. Located in Batam, the Nongsa Digital Park aims to brings tech entrepreneurs in the region together. The park will also support the ambitious plan of President Jokowi to create 1,000 new tech startups by 2020.

The government is working to develop the park into a special economic zone. Investors will enjoy several benefits, for instance, the negative list, which restricts foreign investment in certain sectors, doesn’t apply in a special economic zone. Turning the park into a special economic zone will also give investors tax holiday and tax allowance. It is estimated that the park will attract up to $500 million of investment and create more than 10,000 jobs in Indonesia.

The Nongsa Park is not the only infrastructure built to maximize Indonesia’s digital potential. The country is currently in the process of building Palapa Ring Satellite to improve the quality of the Internet service. The satellite will provide fast broadband service especially in rural areas, where internet penetration still remains low.

In due course, better infrastructure will lead to more opportunities for tech businesses to grow. The new infrastructures will also be an important foundation as the tech industry in Indonesia is projected to contribute 11% of GDP or around $130 billion by 2020.

Case Study 1: SAM Labs

SAM Labs is an educational technology company that empowers teachers with the most engaging STEAM (science, technology, engineering, arts and mathematics) solution including lesson plans, apps and electronics. The goal is to inspire every student to discover the fun in coding and creating. By combining highly engaging software with intuitive, user-friendly hardware, SAM Labs products help educators teach coding and engineering to children of all skill sets and interests. SAM Labs has partnerships in place with governments and company initiatives such as the City of Helsinki, the UAE Ministry of Education, Microsoft Education, and Intel Education.

The founder and CEO Joachim Horn, a young entrepreneur who graduated in mechanical engineering, founded the company in 2014. Joachim was working in Tokyo when the idea for SAM Labs came to him over a bowl of soba noodles. He wanted to create the technology to help students code and create their own connected devices. Joachim fused his passion for education, design and tech to develop what is now known as SAM Labs.

In November 2017, SAM labs raised GBP 5.1 million in a Series A round led by Touchstone Innovations and E15 Ventures. The company currently employs 28 people in the UK.

Case Study 2: Qardio

Qardio is a tech and life science company launched in 2012 with the inspiring mission of transforming the healthcare industry with simpler, smarter and more effective solutions for everyone. Aware that in today’s world, one in three adults lives with a chronic heart condition, making it very difficult to enjoy a normal life without compromising your lifestyle. Founders of Qardio, MP and RI, decided to change that by creating Qardio. Today, Qardio revolutionises personal health monitoring by bringing innovative technologies, high-end design and exceptional user experience to the medical industry.

Between November 2012 and December 2013, from their base in Amsterdam, Qardio raised its first 1.9 million dollars. This allowed the company to establish their current headquarter in San Francisco and to open an office in London. By the time the business took off, with B2C sales at Apple stores, the company also opened offices in Hong Kong, Sydney and Shanghai. The company currently employs 80 staff globally.

Conclusions

Tech startups are cool. They are also changing the world as we know it. Every industry is getting affected and sometimes disrupted and this trend is accelerating. While most of the biggest and well-known tech players are developed in the US, several large players are now expanding from China, such as WeChat (messaging, social media and online payment), Mobike (shared bikes), Tmall and JD.com (e-commerce). However, we can expect the playground to expand as a new wave of innovations sparkle from around the world. Whether they will be able to expand further than their home country, and rise to worldwide fame will remain to be seen.